by T. GormanPosted on Posted in SECActions

The Commission filed another strict liability, SOX 304 action, seeking to clawback certain CEO and CFO compensation. This time the defendants are Michael Baker and Michael Gluck, respectively, the CEO from 1997 through February 2009, and CFO from May 2006 through December 2008, of ArthroCare Corporation. SEC v. Baker, Case No. 1:12-cv-00285 (W.D. Tx. Filed April 2, 2012).

ArtroCare is an Austin, Texas based manufacturer of medical devices whose shares are traded on NASDAQ. From 2006 through the first quarter of 2008 two company sales executives, John Raffle and David Applegate, engaged in a channel stuffing scheme which resulted in the improper inflation of company revenue and earnings. Specifically, during that time period the two salesmen shipped certain products to distributors even though they often did not need, or have the ability to pay for, them. As a result for 2006, 2007 and the first quarter of 2008 revenues were overstated by, respectively 7.9%, 14.1% and 17.4% totaling almost $72.3 million. For the same period net income was overstated by 14.5% in 2006, 8,694.3% for 2007 and 315.2% for the first quarter of 2008, totaling about $53.7 million. As a result the company was required to restate its financial statements.

The Commission previously brought an enforcement action against the two salesmen. SEC v. Raffle, Civil Action No. 1:11-cv-540 (W.D. Tx. Filed June 27, 2011). Mr. Applegate settled that action. Lit. Rel. No. 22027 (July 5, 2011).

Most of the Commission’s complaint details the fraudulent conduct of the two salesmen. It notes at the outset, however, that “The Commission does not allege that Banker and Gluk participated in the wrongful conduct.” Rather, the complaint seeks the repayment of cash bonuses, incentive and equity-based compensation and profits from the sale of company stock under SOX 304 during the 12 month periods following the issuance of the quarterly and annual financial statements later restated. The amount of the compensation and stock sale revenue to be clawedback is not specified.

This is not the first strict liability clawback action brought by the SEC. That case is SEC v. Jenkins, CV 09-01510 (D.Arix. Filed July 22, 2009) brought against the former CEO of CSK Auto. That case ultimately settled following the rejection by the Commission of a settlement offer of partial repayment. See also SEC v. O’Dell, Civil Action No. 1:10-CV-00909 (D.D.C. Filed June 2, 2010). While it is clearly debatable as to whether a strict liability interpretation constitutes good enforcement policy, the Commission’s position has been sustained by the Second Circuit. Cohen v. Viray, Case No. 3860-cv (2nd Cir. Sept. 30, 2010).

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by T. GormanPosted on Posted in SECActions

The OECD Working Group On Bribery highlighted the efforts the UK in the anti-corruption area in a most recent report (here). That Report also contains a number of recommendations for future improvements.

The Working Group concluded that the SFO and other relevant law enforcement agencies have significantly increased foreign bribery enforcement. The Group commended the UK for publishing its Guidance to Commercial Organizations. The UK government has made what the Report calls “substantial efforts” to raise awareness of the Bribery Act. Those efforts and the publicity surrounding the new Bribery Act have led to a heightened awareness of these issues in the UK. The Group commended the approach of the UK in requiring companies to compensate the country of a bribed official.

The OECD Working Group also made a series of recommendations. Those include:

  • Maintaining the current role of the SFO;
  • Reconsidering the SFO’s policy of systematically settling self-reporting foreign bribery cases civilly whenever possible and taking steps to ensure that in these cases there are proportionate and effective sanctions;
  • Making public, where appropriate, as much information as possible about settlement agreements;
  • Avoiding confidentiality agreements which prevent the disclosure of key information about settled cases;
  • Clarifying guidance on what constitutes “reasonable and proportionate” hospitality and promotional expenditures, including the reference to industry norms;
  • Continuing to provide evidence to other countries after settlements where appropriate;
  • Developing firm criteria for assessing if companies are moving toward “zero tolerance” of facilitation payments;
  • The SFO’s process of “giving advice to companies and accepting self-reports of wrongdoing also needs to be more transparent and better defined;”
  • On corporate monitors, providing guidance regarding when and under what terms one would be sought; and
  • On public procurement, “consider undertaking a systematic approach to allow relevant agencies to easily access information on companies sanctioned for corruption such as through the establishment of a national debarment register. . . ”

The Working Group plans to follow up on certain issues including those related to guidance under the Bribery Act, facilitation payments and settlements.

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